Business, 21.06.2021 21:10, annikafischer

Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for a new home product. The customer wants 100,000 parts per year for eight years. To provide these parts, Birmingham would need to acquire a $500,000 new production machine. The new machine would have no salvage value at the end of its eight-year life. The customer has offered to pay Birmingham $7.50 per unit for the parts. Birmingham’s managers have estimated that, in addition to the new machine, the company would incur the following costs to produce each part: Direct labor $2.00
Direct material $2.50
Variable 2.00
Total $6.50

In addition, annual fixed out-of-pocket costs related to the production of these parts would be $20,000.

a. Compute the net present value of the machine investment, assuming that the company uses a discount rate of 9 percent to evaluate capital projects.
b. Based on the NPV computed in (a), is the machine a worthwhile investment? Explain.
c. In addition to the NPV, what other factors should Birmingham’s managers consider when making the investment decision?

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Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-p...